Friday 7 June 2013

From Huddled Masses to Property Investors

Both Paul Krugman and Frances Coppola are worried about emigration in respect of the Eurozone crisis. Coppola believes that the impact of Eurozone austerity on youth unemployment may lead to mass migration, which in turn will reduce future tax revenues required to fund pensions, resulting in the gradual desertification of the periphery. Krugman asks if labour mobility is making the Eurozone crisis worse.

I am dubious about this for two reasons. First, modern migration flows have only a marginal effect on population and take decades to become substantial. For example, the foreign-born share of the UK population increased from 4.2% in 1951 to 11.9% in 2010. That's a change of about 1.3% per decade. We are seduced by folk memories of "poor, huddled masses" in the late 19th and early 20th century into overestimating the scale of such movements. This is compounded by modern anti-immigration scares that talk up the numbers. We also easily forget that immigration and emigration offset each other. The net impact on the working population is much smaller than the raw count in any one direction.

Of course there have been times when a significant number, particularly of young adults, have emigrated, but it would be wrong to conclude that a persistent outward flow means an inexorable slide to national doom. The Celtic Tiger years in Ireland came after over a century of relatively high emigration, so losing lots of bright young things does not necessarily condemn a country to an elderly population and low growth for ever more. It isn't a one-way ticket for a nation, even if it is for the individuals involved.

In fact, since WW2 we have seen a growing tendency for migrants to return "home" periodically and at the end of their working career (this is common among Irish and West Indian emigrants in the UK, for example). This is due to a number of factors: better and cheaper transport, greater wealth, and (particularly in the EU) easier labour and capital mobility. The last of these has also fed emigration by the non-working population, such as Northern European retirees transplanting to Spain, Portugal and Greece (a consequence of this is that a large part of current emigration from the periphery to the core is actually made up of returning migrants - i.e. repatriation - rather than being predominantly a native brain drain).

The second reason is that the immediate impact of the 2008 crisis was a slowdown in migration, not an acceleration. In that light, evidence of increased flows in the last 2 years may actually be a healthy sign - i.e. the market for migrants picking up again because of increased demand for their labour. People don't emigrate for work (and aren't allowed entry by target states) unless there is a reasonable prospect of employment. If millions of Greek and Spanish youth are quitting Europe, that would be a bad sign, but if thousands are moving to London, Amsterdam and Munich, then that looks like business as usual.

Frances Coppola notes that the Euro, in preventing currency devaluation, obliges the periphery to pursue internal devaluation, i.e. pushing down nominal wages, and fears that this will lead to Greek youth taking better paid jobs in Germany. This is true, but the countervailing tendency is to make it attractive for employers to transfer jobs from the high-wage core to the low-wage periphery, much as those states attracted inward investment in the 80s and 90s through devaluation. The key change brought about by the Euro is that it protects cash and capital (Euro-denominated assets) at the expense of labour (wages). This a feature, not a bug. Pre-Euro, devaluation would erode the value of capital and cash in the periphery more than real wages.

Austerity advances the neoliberal agenda: it privileges multinationals (you can expect more Siemens and VW plants to open in the periphery as wages drop); it advances labour market deregulation (it's worth remembering that Germany has no minimum wage) and "prices" workers into jobs by reducing benefits; it pushes "structural reforms" (i.e. public sector cuts and privatisation); and it seeks to extirpate the remnants of old-style, Southern European corporatism (e.g. generous public sector pensions). This is why it is wrong to assume the ECB and EU Commission's strategy is the product of sheer dunderheadedness, as Krugman is wont to do: "it’s hard to think of any previous episode in in the history of economic thought in which we had as thorough a showdown between opposing views, and as thorough a collapse, practical and intellectual, of one side of the argument. And yet nothing changes". Perhaps that's because the results of austerity are actually the point of the exercise.

Frances Coppola is concerned that emigrants may be less likely to remit cash to support aged parents than was the case in the past, and that coupled with the absence of youth's output from a shrunken domestic economy, this will make state pensions unaffordable. Traditionally, emigrants did send cash remittances back home for this purpose, but from the 80s onwards, as state pensions took up the slack, this flow of income was increasingly diverted into property, famously the Southfork-style bungalows that now dot the Irish countryside and the "rusty rod" villas of Greece. We're familiar with the way that the Euro recycled cheap bank credit from the core to the periphery to support domestic property demand, but a contributory factor was emigrant demand for a home in the old country with an eye to retirement. The problem is that much of this recycled wealth evaporated with the crash. It would have been better to stuff Euros under the mattress. If pensions are in peril in the Eurozone periphery, this is more the result of the property bubble than emigration.

Though some current emigration is out of the EU (e.g. Portuguese youth going to Brazil and Angola), much of it will remain within Europe (e.g. Portuguese youth going to Switzerland and Germany). Emigration out of the EU can also be offset by immigration from poorer countries in Eastern Europe, the Middle East and Africa (though this presumes the political will to allow this). The real demographic challenge is not emigration but low birth rates in the near-term coupled with the longer-term likelihood that immigration from Asia and Africa will dwindle as those continents increase their domestic demand for skilled workers. Emigration is the least of our worries.

That said, it also needs to be emphasised that the greying of the population is manageable. Though the proportion of the population producing tax revenues to fund pensions may decline, long-run increased productivity (due to technology) will offset this. The result may be negligible net growth (as seen in Japan), but this isn't the end of the world. The same applies in respect of the health care burden of the elderly. While demographic pressure increases this as a proportion of GDP, technology can offset this too, despite the inherent challenges of Baumol's cost disease. At a certain point, the elderly "bulge" will also start to reduce (i.e. as baby-boomers die), which will boost GDP growth as the working population increases relative to the elderly cohort. We are not doomed, though we will be faced with a novel challenge: managing a shrinking population.

Adjusting for a changed demographic is ultimately a question of redistribution and therefore a political choice. The claim that this is a factor beyond our control is ideological. As I've mentioned before, the regular predictions of doom in respect of both pensions and health care costs can usually be traced back to a belief that we cannot afford the welfare state at any price. Though the fear of the deleterious impact of emigration seems more prevalent on the political centre-left, I think it is just as misplaced as the belief that an ageing population is insupportable.

No comments:

Post a Comment